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Camkids Group - Rerate due

Camkids Group (LSE:CAMK), a Chinese based general retailer focused on providing the Chinese teenager market with outdoor equipment/clothing recently completed its IPO on Christmas Eve 2012. The group looks well-positioned for growth on the back of China's economic rise and is fundamentally undervalued - similarly to Naibu Global International (LSE:NBU) which has risen by more than 20% since the initial review. The group has 75 million shares in issue at 102.5p/share giving it a market capitalisation of £77.3m. The company looks set to rise as inherent doubts are dispelled.
A short introductory video by the company outlines the purpose and highlights some facts about Camkids as below:

As shown on the right, Camkids closed its first day of trading just above 95p/share before dropping to a closing low at 83.5p/share. However, the share rebounded strongly, forming a general upward trend to a current share price of 102.5p/share having made a high at just over 105p/share. It is near impossible to draw any significant/relevant trend lines on the chart due to a lack of historic levels hence I have left the chart blank. Normally, immediately following IPOs, charts tend to go out the window as shares re-rate to more appropriate levels. This can be seen via companies such as Wandisco (LSE:WAND) which closed its first day of trading in mid-2012 at 200p/share. It now stands at 800p/share. The upward trend bodes well though as it shows that some investors have already taken an interest in Camkids. The largest shareholder is the Chairman (Zhang Congming) who owns roughly two-thirds of all the shares. Just under 19% of the remaining shares are owned by the next four largest shareholders meaning that the market supply is relatively limited - despite this, Camkids retains a relatively narrow spread.

Camkids Group owns a wholly owned subsidiary Camkids HK (incorporated in China) which owns Mingwei (the operating company in China). Camkids participates in the creation cycle of outdoor clothes and equipment through designing, manufacturing and distributing their 'Camkids' branded goods. The products are then sold through these outlets. The group focuses upon three types of outdoor product; clothing, footwear and equipment within which the main target audience are those aged 8-12 although products are made for all ages up until 18. The group has a significant market share of 11.1% (by retail sales value) which has strengthened the brand within China. The group has distribution channels exceeding 1000 outlets with this expected to increase as the company grows - particularly in the more Western Chinese provinces.

The Chinese market for apparel and footwear totalled £11.6 billion in 2010 with this figure being a market increase upon recent years. The average household income in China has been reported to be 88% higher than three years ago (by GroupM's Deep Rive Project) with many firms reaping the rewards as consumers become more willing to spend their increased disposable incomes, especially on their only child (as this is capped by China's one-child policy). With the number of under-18's falling in China, an ageing population has developed which has actually led to more of an emphasis and increased spending on the current youths from the parents and grandparents. This is still expected to accelerate forward.

The company has a three stage plan to further its sales in China;- increasing design and R&D capabilities- strengthening and optimising distribution channels- enhancing production capability

However, it is the financials of Camkids that makes it stand out as an undervalued firm with the market once again factoring in the 'Chinese risk factor'. I have converted the results to GBP and are tabulated below.

Clearly the group is enjoying very strong growth and that looks set to have continued in 2012 with half-year results already broadly matching half of those achieved in 2011. However, the group has noted that the second half of each year tends to generate more profit than the first half due to the presence of public holidays (National Day & Chinese New Year). Furthermore, the winter-based clothing and accessories have higher prices than the summer counterparts which exaggerates this. Consequently it is likely that revenues will once again exceed the previous year (2011). In addition to the above, gross profit margins have increased to 35.9%. Elsewhere in the admission statement, cash and cash equivalents at 30th June 2012 stood at £19.2m. Short term borrowings totalled £612k with due income tax at £1.04m. Combined with the additional £6.4m the company raised during the IPO, it is evident that there is no disputing how 'cheap' Camkids Group's shares are.

Estimates for H2 2012 suggest revenues of a further £54.72m which totals ~£91m for the FY. Net Profit for H2 is also estimated to be £11.9m adding significantly to the £8m in H1.

courtesy of Philip Jagenstedt on flickr

The company did also mention in its admission document that it may look to acquire 'value-enhancing' complementary businesses - the group already outsources some of its manufacture to third-parties to cope with fluctuations in demand. The group also has an agreement whereby the distributing stores have exclusive rights to a particular geographic area. In return, competing products are not shelved. If a new store wishes to be built, Camkids subsidises this through giving ~£5k to ensure that brand consistency is kept. Camkids has signalled its intent to initiate a progressive dividend policy when appropriate.

Allenby Capital says the following: "We forecast a 2012 eps of RMB 2.60 (26p) which, at 88p, implies a 2012 Price Earnings ("P/E") ratio of just 3.4 times. A sector P/E ratio of around 6 times, which we think to be more appropriate, would imply a value of £1.54 ". Even at 154p/share, no forward momentum or additional premium would be priced in.

Camkids issued a trading statement in late January outlining developments for the 2012 calendar year. It contained: "The Board is pleased to confirm that the Company expects to report results ahead of market expectations for the financial year ended 31 December 2012. This was achieved even though the Group incurred one-off costs arising from its IPO (~£1m) on AIM in December 2012. The Company is also encouraged that the H1 2013 order book, following the spring/summer seasonal sales fair held in Q4 2012, is more than 22 per cent. ahead of the H1 2012 order book." With such a positive update, the company looks poised for significant upside when the results are released in early April - the company is still off the radar for many people, but arguably it seems to have slightly better communications with shareholders (due to Allenby Capital) than Naibu Global International.

Camkids, similarly to Naibu Global, offers investors a way to trade the Chinese wealth story. As the economy continues to grow (albeit at a slower rate), only now is the Chinese population beginning to see progressive increases in their income and their standard of living. With new Chinese policies being implemented to shift the country from a planned to a market economy in addition to further urbanisation, Camkids should look forward to continued strong results in the future. The most significant risk to Camkids is if the import tariffs are reduced in combination with unfavourable exchange rate movements. These could make other foreign brands more affordable which could squeeze out domestic competition. However, this seems unlikely not least due to Camkids already being an established brand. It has the second largest market share (at 11.1%) just behind Nike Kids (11.3%) and ahead of Adidas Kids (9.5%). With a market cap of just £77.3m, free cash of over £20m, with a similar amount potentially replicated in FY profits, Camkids looks set to rerate significantly.

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